Regulating for a Digital Economy: Understanding the Importance of Cross Border Data Flows in Asia

By Dianna James

Reposted from Brookings…https://www.brookings.edu/research/regulating-for-a-digital-economy-understanding-the-importance-of-cross-border-data-flows-in-asia/

The world is experiencing unprecedented increases in connectivity and global data flows. This is underpinning the so-called fourth industrial revolution, which is characterized by end-to-end digitization of all assets and integration into a digital ecosystem.[1] It heralds the fourth major upheaval in modern manufacturing after the lean revolution of the 1970s, outsourcing in the 1990s, and automation in the 2000s.[2]

The Asia Pacific continues to be one of the fastest growing regions in the world, both economically, and in terms of connectivity. By 2017, Asia had the largest number of internet users in the world, with 1.9 billion people online.

Cross-border data access, usage, and exchange are essential to economic growth in the digital age. Every sector—including manufacturing, services, agriculture, and retail—relies on data and on the global flow of that data. Whether directly, or by indirectly taking advantage of global-scale data infrastructure such as cloud computing, global connectivity has enabled cross-border economic activity, allowing individuals, startups, and small businesses to participate in global markets.

At its core, the digitization of economies and international trade should improve efficiency and increase productivity.[3] By increasing access to information, the internet increases productivity and enables markets to function more efficiently. The free flow of data reduces transaction costs and the constraints of distance, and increases organizational efficiencies. Increases in connectivity accelerate the spread of ideas and allow users worldwide to make use of new research and technologies, leading to the emergence of new enterprises.[4] Extending internet access can also increase market efficiency by reducing barriers to market entry, and allowing small and medium-size enterprises to reach vastly broader markets.[5]

Global data flows are also transforming the nature of international trade, creating new opportunities for businesses to participate in the global economy by selling goods and services directly to customers and plugging into global value chains. McKinsey & Company estimates that global data flows raised global GDP by approximately 3.5 percent over what would have occurred without such flows, equivalent to $2.8 trillion dollars in 2014.[6]

GLOBAL DATA ARE TRANSFORMING INTERNATIONAL TRADE

Data flows are transforming international trade in the following ways:

Businesses can use the internet (i.e., digital platforms) to export goods.

Services can be purchased and consumed online.

Data collection and analysis is allowing new services (often also provided online) to add value to goods exports.

GLOBAL DATA FLOWS ALSO CREATE ECONOMIC AND TRADE OPPORTUNITIES FOR SMALL BUSINESSES

The internet and global data flows are a particular opportunity for small businesses to participate in international trade. This is particularly significant for East Asia, where small businesses comprise 60-99 percent of all businesses, are responsible for 50-98 percent of all employment, and contribute 35-70 percent of GDP.[8] Using digital platforms such as eBay or Alibaba, small businesses can reach customers globally. Access to digital inputs such as cloud computing provides on-demand access to computing power and software that was previously reserved for large companies. Such digital services can be used to reduce fixed information technology costs and increase business competitiveness.

MEASURING THE ECONOMIC AND TRADE IMPACTS OF CROSS-BORDER DATA FLOWS

A number of studies have been published that highlight the scale and importance of cross-border data flows. These studies point to the growing economic significance of data flows, and are beginning to provide useful benchmarks and indicators of the extent of the impact.[9] Key findings of the studies include:

In 2014, the free flow of data was estimated to have contributed $2.8 trillion to the global economy,[10] a figure that could reach $11 trillion by 2025.[11] The same study estimates around 12 percent of international trade in goods has been estimated to occur through global e-commerce platforms such as Alibaba and Amazon.

In the United States, digital trade has raised GDP by 3.4–4.8 percent by increasing productivity and lowering the costs of trade; it has also increased wages and likely contributed to creating as many as 2.4 million new jobs.[12]

A 2016 World Bank study found that a 10 percent increase in internet penetration in the exporting country leads to a 1.9 percent increase in exports along the extensive margin (the quantity of goods), and a 10 percent increase in internet penetration in the importing country leads to a 0.6 percent increase exports along the intensive margin (the average value of goods).[13]

Because of limitations in the data, each of these pictures are still incomplete and, in almost all cases, provide only rough estimates of the impact of data on growth and jobs.

GOVERNMENTS ARE INCREASINGLY RESTRICTING CROSS-BORDER DATA FLOWS

While the economic and trade opportunity from connectivity and data flows are significant, governments are increasingly introducing measures which restrict data flows—data localization measures.

Such measures will have economic and trade costs. According to a study by Bauer et al, the cost of proposed and enacted data localization measures in India, Indonesia, and Vietnam would reduce GDP in India (-0.1 percent), Indonesia (-0.5 percent), and Vietnam (-1.7 percent).[14]

Cross-border data flow restrictions can take one of several forms. From most restrictive to least, examples include:

The data cannot be transferred outside national borders.

The data can be transferred outside national borders, but a copy must be maintained domestically.

Prior consent is required before global transfers are allowed.

THERE ARE DIFFERENT GOALS BEING PURSUED BY DATA FLOW RESTRICTIONS

Governments restrict cross-border data flows with several goals in mind, with the main ones being to:

Protect or improve citizens’ personal privacy

Ensure rapid access to data by law enforcement officials.

Protect or ensure national security

Improve economic growth or economic competitiveness

Level the regulatory playing field

The key focus for all governments when designing regulation to achieve legitimate goals should be to manage risk—whether to privacy, from cyberattack or the impact of delays to law enforcement agencies—to an acceptable level relative to the economic and social benefits, including innovation, expected from these activities.[15]

While it is up to each government to determine its acceptable level of risk, in most cases, data localization is suboptimal in that there are ways to achieve legitimate regulatory goals with less impact on economic growth and trade.

The impact of data localization requirements on overall domestic investments has been shown to be considerable, causing lower economic growth and reduced exports.[16]

Restrictions on cross-border data flows harm both the competitiveness of the country implementing the policies and other countries. Every time one country erects barriers to data flows, another country that relies on these data flows is also affected.[17]

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The mission of the Partnership for Online Platforms and Sustainable Development is to promote dialogue, research, and information sharing on the role of online platforms as drivers of development and inclusive growth in Asia.